How financial institutions can safeguard integrity with the three-step risk-based method


In a recent post by Fenergo, the company outlined how FI’s are able to safeguard integrity with a three-step risk-based method. 

Regulatory bodies consider risk assessment a cornerstone of a firm’s AML framework. This emphasis has placed customer risk profiling in the limelight due to escalating regulatory scrutiny and consequential substantial fines.

Financial institutions are now urged to actively adopt a risk-based approach, coupled with comprehensive KYC procedures, to fortify their reputation, resilience, and regulatory alignment.

The Financial Action Task Force (FATF) illustrates the “risk-based approach” as a process enabling nations, competent entities, and banks to pinpoint, evaluate, and fathom money laundering and terrorist financing risks they might encounter. They then initiate appropriate risk-mitigation measures proportionate to the identified risks. This strategy is versatile, finding applications in multiple domains such as business, finance, security, and regulatory compliance.

For banking-sector businesses, this translates into meticulous customer risk profiling, which involves identifying, alleviating, and monitoring the associated risks of every client interaction. The comprehensive management of banking clients spans their entire lifecycle – starting from initial KYC processes, continuing with regular reviews, and finally, offboarding. Such thorough risk management practices are paramount to shield both financial establishments and the broader financial services sector from dire financial transgressions.

Fenergo’s Client Lifecycle Management solution is an industry leader, empowering organisations with digital tools to transition clients seamlessly from onboarding through to offboarding. Coupled with the Client Onboarding solution, due diligence, risk scoring, and compliance processes are seamlessly automated, streamlining the entire onboarding process.

An efficacious risk-based approach encapsulates three pivotal phases:

Identify & Assess the Risk: Organisations, in this phase, delve deep to grasp the extent of potential threats. By garnering salient information such as the industry, jurisdictions, types of transactions, cash intensiveness, volume, value, third-party interactions, and beneficial ownership details of the client, organisations gain a comprehensive client profile. This profile provides an overarching view of possible risks spanning client risk, product/service risk, and country risk. After evaluating the risk factors, clients are slotted into risk categories. Businesses, at this juncture, should introspect their risk-handling capabilities.

Risk Mitigation and Contingency Planning: After spotlighting the most pressing risks, the next step delineates their mitigation strategy. An array of measures, including risk management controls, preventive measures, risk transfer, and contingency planning, are utilised.

Monitor and Review the Residual Risk Profile: This stage evaluates the efficacy of implemented mitigation methods. Continuous monitoring and periodic client profile evaluations are essential to this phase, ensuring that any anomalies, red flags, or alerts are promptly addressed, aligning client profiles with the company’s risk appetite.

In 2021, the UK’s Financial Conduct Authority (FCA) levied a fine of £264m against a prominent bank for AML regulation breaches. The penalty was attributed to the bank’s oversight in managing a commercial jeweller client, resulting in cash deposits vastly deviating from initial projections. This real-life scenario exemplifies how a structured risk-based approach might have circumvented such hefty regulatory penalties.

A proactive stance on AML, through the risk-based approach, enables financial institutions to pivot their resources towards foresight-driven risk assessment and mitigation. This proactive method bolsters their defence against financial crimes, diminishes compliance risks, and curtails potential regulatory infringements.

In conclusion, risk-based approaches signify proactive self-regulation and epitomise an evolved compliance programme.

Read the full post here.

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